Summer is a time for American workers to relax and take vacations, but for a select population, a permanent vacation may be on the horizon.”¯ Specifically, a massive wave of baby boomers, those born between 1946 and ”™64, will be retiring. Indeed, according to the U.S. Census Bureau, by 2030, all baby boomers will be 65 or older.”¯
Yet many people do not understand all the investments available in their retirement plans and also, sadly, don”™t get enough guidance from a professional. So they just let their contributions default to a target-date fund, a mix of stocks, bonds and other investments that the fund adjusts to more conservative instruments as the person gets closer to retirement. It”™s not a proactive strategy that takes into account your individual needs and goals.
When it comes to 403(b) plans ”“ which nonprofits offer, versus the 401(k)s of for-profit companies ”“ many workers default to a long-term annuity or a guaranteed account, which may pay you a set amount monthly regardless of market performance but which may contain high fees and penalties for early withdrawal, as well as offer below-market returns. In the case of these and target-date funds, investors may be leaving a lot of money on the table unnecessarily.
Employees also find it confusing to decide between a traditional 401(k), in which you pay tax at the withdrawal, and a Roth 401(k), in which you pay tax upfront ”“ assuming that their employer offers both. The siren song of tax-free withdrawals from a Roth 401(k) or Roth 403(b) can be alluring, but there are many other factors to explore.”¯This is a situation where consulting with a financial adviser can be helpful.
One of the great debates, particularly for baby boomers, is whether to roll your retirement plan over to an IRA when you leave a company. There is a lot at play here. The U.S. Department of Labor requires advisers to tell retirement-bound investors what rollover strategy is in their best interests. When considering a rollover, it”™s important to review fees, investment options and who is acting as a fiduciary for you, among other things.
In my role as founding CEO of Metric Financial, I”™m often asked if clients should only put into their retirement plan as much as the company matches. While everyone”™s situation is different, our general answer is it”™s still a tax-deductible contribution, whether your employer matches it or not. The more important consideration is what is your comfort zone in having money taken out of your paycheck to put into funds that will be inaccessible until age 59 ½? You still have to have money to live on as well as a sufficient emergency fund in the bank.
Some other things for those approaching retirement to think about: Which Medicare plan is right for you medically and financially? And should you take Social Security when you are fully vested ”“ an age that varies with each person ”“ or at 70, the maximum age of withdrawal, when you will be guaranteed an 8 percent increase? Much of this will depend on your personal as well as financial health.
Ultimately, a person”™s retirement plan should be part of a broader financial plan, which should be a one-stop place where the investors can see everything in their financial lives. A good plan will spell out the liquidity picture; total investment portfolio; income versus expenses and therefore annual free cash flow; optimal Social Security strategy, regardless of age; chances of success in reaching financial goals like retirement and education spending; and much more.”¯”¯
Start early and finish late: You”™re never too young to have a plan and you”™re never too old to keep revisiting it.
Chartered Financial Analyst Timothy Baker is the founding CEO of Metric Financial, a Granby, Connecticut-based investment management and financial planning firm that offers educational sessions and public seminars on creating and preserving wealth for one”™s retirement.”¯For more, visit metricfin.com.
